Insights & Advice


The Romney/Obama Rally

The first presidential debate went to Mitt Romney. The markets liked his performance. But they liked the employment data on Friday almost as much. Further good news should continue to support the markets into the elections.

Clearly, Mitt came out swinging and gave the market sound bite after sound bite that investors were dying to hear. President Obama, on the other hand, came across as the great naysayer citing the impossibility of Governor Romney’s math in getting the country back on its feet again without raising taxes.

In the meantime, the headline employment data announced on Friday was greeted with another burst of buying. The president was quick to take credit for the fall in the unemployment rate. Whether that was justified may be a question for next week. The economy gained just 114,000 new jobs last month but the unemployment rate declined to 7.8%, the lowest rate in 44 months. The decline might be good for politics but underneath the data the job statistics were distorted by an influx of part-time workers and the number of unemployed workers who have simply given up looking for a job.

I will remind readers that, however the numbers were derived, my prediction of a year ago that the unemployment rate would drop below 8% by the end of this year has now come true. I credit the Fed rather than the Obama Administration for the decline. What remains to be seen is whether the rate of job growth can accelerate in the future. I’m thinking it can because the central bank’s new QE III is just what the doctor ordered, in my opinion.

The Fed is targeting the housing sector directly with its $40 billion in monthly mortgage-backed security (MBS) purchases. The hope is that as the MBS inventory declines, banks will be spurred to make new mortgage loans or refinance existing loans. As the housing market continues to rebound, it should generate new demand for construction workers. On the margin, that could provide employment for a lot of young workers or those with little education and low skill levels.

Yet, according to a recent Wall street Journal article, individual investors are still abandoning the stock market despite the recent gains and the promise of further economic growth. The retail investor has sold $138 billion in equity mutual funds and exchange traded funds, while pouring over $1 trillion into bond funds. Given the lack of trust we all have in the equity markets, the financial sector overall and banks and brokers in particular, the retail investor has simply decided not to participate.

That may be true, but recently I have been receiving quite a flurry of phone calls and e-mails from individuals (retired and otherwise). These investors have been sitting in cash, bank checking accounts, CDs and/or U.S. Treasury Bonds.  Most of them are dismayed, disgruntled and extremely worried. As one caller put it:

“At the interest rates I’m getting, not only can I not afford to live, but I’m actually losing my shirt after inflation.”

It is a testament to how low rates have gone that even today’s moderate inflation rate of 2.3% is turning individuals’ savings rates negative. It may be that at long last the central bank’s strategy of lowering rates to a point where investors are forced to capitulate and forsake the safe haven of fixed income and money markets for the stock market may be working. The comparison between stocks and bonds becomes even more compelling given the 16% gain accrued in the stock market thus far in 2012 (as represented by the S&P 500 Index). If at some point the retail investor were to actually re-enter the stock market, that demand would really goose the markets higher. Stay invested.

Posted in The Retired Advisor